Political and Economic Crises (Pt 4)

Trump and ‘Party of Order’ unite to declare war on Bolivarian Venezuela

On Jan. 23, after conferring with U.S. Vice President Mike Pence, Venezuelan right-wing politician Juan Guaidó declared himself “interim president” of Venezuela. The United States promptly recognized Guaidó as the “interim president.” Trump refused to rule out a military attack against Venezuela if the government of President Nicolas Maduro and the Venezuelan people resist the U.S. government’s appointment.

In a series of moves that included breaking diplomatic relations with the legitimate government, appointing a puppet government in its place, seizing state assets and handing them over to the puppet government, demanding that Venezuela’s military support the puppet, and threatening direct military action if the Venezuelan military refuses, “commander-in-chief” Donald Trump’s order amounts to a declaration of war against the government and people of oil-rich Venezuela.

As part of the war drive, Trump imposed a full-scale economic blockade against Venezuela. The assets of the state oil company held abroad, including its U.S branch Citgo, has been seized and handed over to the puppet Guaidó “government.” Venezuelan bank accounts have been frozen, including $1.2 billion in gold bullion held in the Bank of England.

Venezuela is one of a bloc of three large oil-producing countries, the other two being Iran and Russia, that is not under the control of the Empire. If Trump succeeds in his war against Venezuela, the pressure on Iran and Russia will increase. For the moment, the war against Venezuela is being fought with economic methods, but this could change at any moment.

Even if the war remains economic, this doesn’t change the fact that it is a war of aggression and, as such, a crime against humanity. By Feb. 6, the European countries of Austria, Belgium, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Iceland, Latvia, Lithuania, Luxembourg, Macedonia, Netherlands, Poland, Portugal, Spain, Sweden, and the UK had recognized the U.S.-appointed “interim president.”

Latin American countries that resist the Empire continue to recognize the legal government of Venezuela. These include socialist Cuba – no surprise there – Bolivia Uruguay, Nicaragua, and the new nationalist government of Mexico, which came to power in January after many years of right-wing rule. On the other hand, Latin American countries ruled by right-wing governments belonging to the so-called Lima group announced that they recognize the Trump-appointed Guaidó as Venezuela’s “interim president.” Among the Latin American governments recognizing Guaidó is the new far-right government of President Jair Bolsonaro in Brazil.

Beyond Latin America, Israel also announced its support for the coup government. In contrast, Syria continues to recognize the Maduro government. Russia, China and Iran also continue to recognize Maduro as the sole legitimate president of Venezuela.

There is a general pattern here. Governments that are integrated into the U.S. empire quickly recognized the coup government and joined the U.S. declaration of war against Venezuela. All other governments recognize Maduro as head of the only legitimate government of Venezuela.

John Bolton, Trump’s extremely hawkish “national security adviser,” has declared Venezuela, Nicaragua and Cuba to be the “troika of tyranny.” Bolton, who is more a “Party of Order” man than a Trumpist, may have used the Russian word “troika” to stir anti-Russian hysteria. In any case, Bolton is making clear that the U.S. has no intention of tolerating any independence on the part of Latin American governments. Trump and the Party of Order won’t be satisfied until Latin America is reduced to a purely colonial relationship with the United States.

Who is responsible for the economic crisis in Venezuela?

Some on the left say that, while they oppose Trump’s attempt to appoint a puppet Venezuelan government, Maduro, a school bus driver by profession, has been a terrible president and economic manager. There is no doubt that Venezuela is in the grip of a terrible economic crisis. But let’s make this clear: Neither Maduro nor the Chavistas as a whole are the cause of it. (1)

When Chavez came to power in 1999, the international cycle that governs the price of oil was near a low point and was about to begin a long upswing that peaked in 2008 when the price briefly touched $147 a barrel. During the last long-term depression in the international price of oil that occurred during the 1990s, when the Chavista movement was born, Venezuela was ravished by hyperinflation. Yet, during that earlier crisis, the U.S. did not attempt to oust the then-Venezuelan government because it proved to be a “bad manager” of the economy.

The years when the Chavez administration governed Venezuela – Chavez died in 2013 – were generally years of high oil prices and therefore prosperity for Venezuela. It is true that the price of oil fell from over $147 to just over $30 a barrel at the height of the 2008 panic. But thanks largely to the U.S. Federal Reserve System’s “quantitative easing” program, the price of oil quickly recovered to over $100 by 2011, which saved Venezuela from a serious economic crisis at the time.

How oil prices affect the Venezuelan economy

Venezuela suffers from what is called by economists a monoculture economy. In such an economy, the world market price of a single commodity largely governs the state of its economy. When the price of oil is high, money represented by U.S. dollars flows into Venezuela. The resulting inflow generates plenty of effective monetary demand for local businesses. The Venezuelan economy booms and employment grows. But when the price of oil drops, money flows out. When this happens, effective demand contracts and the economy falls into crisis.

If the Venezuelan government attempts to make up for the lack of money in the form of U.S. dollars by printing more legal-tender local currency, the local currency falls sharply against the dollar – and ultimately against the money commodity gold, which the dollar represents in circulation on the world market.

A process of currency-devaluation inflation begins. Prices rise in terms of local currency obliging the Venezuelan central bank to print still more local currency to meet rising costs and interest rates in terms of the local currency, which causes an even sharper rise in prices. This leads to the vicious circle of runaway and then hyperinflation that we see in Venezuela today.

This mechanism operates in a way similar to fluctuations in the production of gold for the world capitalist economy under the dollar system. When gold production is strong, the Federal Reserve System can create large quantities of new dollars without the dollar depreciating, and the global capitalist economy booms. When the production of new gold declines, the ability of the Federal Reserve to create additional dollars without the dollar depreciating declines. If the Federal Reserve tries to make up for the shortage of new money material flowing from the gold mines by creating additional dollars anyway, inflation rises across the globe. This is exactly what happened in the 1970s.

An important difference, however, between a monoculture economy such as Venezuela’s and the global capitalist economy under the dollar system is that an unfavorable balance of payments can quickly reduce the quantity of money (measured in terms of the total amount of dollars – and ultimately gold – that the total quantity of internal currency represents. The actual quantity of gold in the global economy never declines but always grows; only the rate of growth in the existing quantity of gold varies as the golden market prices of commodities fluctuate around the golden prices of production on the world market, which also rise and fall over time. (2)

Where Chavez was different

Chavez was not just another “prosperity” Venezuelan president, however. Instead of allowing the oligarchy to consume virtually all the boom-time oil revenues like previous Venezuelan presidents had, his government distributed the oil revenues to the working class and poor of the cities and countryside. Massive housing construction programs that built more than 2.5 million homes were carried out, education was expanded, and a crash program to tackle illiteracy was carried out, while health care became available to the mass of poor and working-class people for the first time. These programs were more than enough to make Chavez the most popular president in Venezuelan history.

But it didn’t stop there. Chavez was a pan-Latin American – not just a narrow Venezuelan – nationalist. He adopted the banner of Simon Bolivar, who in the 19th century attempted to unify Latin America into a single nation-state. Making Latin America a single nation-state would go a long way to solving the problem of monoculture economies that lead to periodic extreme economic crises and hyper-inflation. As we have seen in previous posts, the most powerful capitalist nation-states resist the development of new nation-states much like individual capitalists resist the emergence of new competitors.

After 1945, the U.S. world empire was organized in no small part to prevent the rise of new bourgeois nation-states that would challenge the existing nation-states. For this reason, the U.S. world empire – the U.S. government and its satellite imperialist governments – has strongly opposed the rise of a strong Iranian nation-state, opposed the movement toward unifying the Arab world into a United Arab Republic, and opposed any movement toward unifying the Latin American nations.

In contrast, President Chavez when he was alive strongly defended the governments of Syria (whose resistance against a failed U.S.-organized coup has been successful, though at tremendous cost in lives and money) and Libya (when Obama ordered the bombing of the loyalist units of the Libyan army, which was in the process of putting down a similar U.S.-supported coup). The governments were identified with movements to unify the Arab world (Syria) and in the case of Libya sub-Saharan Africa. President Maduro has continued these policies.

As we know, the administration of George W. Bush organized a coup to oust Hugo Chavez from office in 2002. The New York Times, assuming it would succeed, hailed the coup as a victory for democracy when in reality it was exactly the opposite. But when in a stunning and truly democratic development, the people of Venezuela rose up forcing the coup government to resign and restore power to Chavez, The New York Times was caught with egg on its face and had to apologize. Washington – and The Times – and other factions of the ruling Party of Order decided to retreat for the time being and wait for a more favorable – for them – opportunity to renew their attack on the government and people of Venezuela.

But Washington hates Venezuela for another reason. Chavez came to Cuba’s rescue during the hour of Cuba’s greatest need. While high oil prices are good for Venezuela, they are bad for Cuba, which has few oil reserves. As oil prices rose on the world market in the 2000s, Cuba lacked the U.S. dollars necessary to purchase the minimal amount of oil it needed to maintain its economy. Under Chavez, a deal with the Cuban government was worked out where Venezuela provided Cuba with oil in exchange for Cuban doctors.

In 2002, the Venezuelan coup government, which was in power for less than 48 hours, announced, that the oil for doctors deal was canceled. After the coup was overthrown, a “bosses’ strike” by high-paid engineers had to be overcome with the help of international volunteers, but eventually, the flow of oil to Cuba was restored.

Both the Venezuelan and Cuban people benefited. Not only was the health of countless poor and working-class Venezuelan people vastly improved, saving many lives, but Cuba survived the cycle of high oil prices. This shows that the road out of the monoculture economy that plagues Venezuela can only be achieved through the integration of the economies of Latin America.

Hugo Chavez, as Fidel Castro explained, proved to be the best friend Cuba ever had. Washington, on the other hand, was livid! This time Trump and his “nationalists” and the Party of Order Democrats and Republicans are determined to make sure that Chavistas don’t get another chance to save the Cuban Revolution.

How the Venezuelan economic crisis really developed

Starting with the oil-centered recession of 2015-16, which affected all countries and hit what was left of the industrial U.S. very hard (3), then-President Obama announced the first anti-Venezuelan sanctions. The liberal Obama was determined to make the developing economic crisis in monoculture Venezuela as bad as possible. When things got really bad, the Obama administration policymakers of the Party of Order figured, conditions would be ripe for a new coup attempt. That time has now arrived.

As the balance of payments turned against Venezuela due to the falling price of oil and Obama’s sanctions, the exchange rate of the Venezuelan Bolivar against the U.S. dollar (and ultimately against the money commodity gold) started to fall. In theory, the Venezuelan central bank could have refused to print extra Bolivars. If it had followed that course, a regime of severe austerity would have descended upon Venezuela. Money in any form, whether U.S. dollars or Bolivars, would have virtually disappeared from circulation.

In that case, the value of Bolivars would have been saved but there would have been virtually none to be had for the workers, the poor, and even the middle class. Instead, the Venezuelan capitalists would have hoarded the very scarce and but valuable Bolivars.

Despite the many pro-working class and pro-poor people reforms carried out under the Chavistas, the Venezuelan economy remains very much a capitalist economy and a monoculture economy at that. It is therefore subject to all the laws that govern capitalist economies in general and monoculture economies in particular. And this is not to mention the effects of sanctions that have since escalated into a full-scale economic blockade.

As Obama’s initial sanctions have developed into a full-scale blockade, Washington is now moving to make it impossible for Venezuela to sell its oil – or anything else – at all. The U.S. government is acting as a gigantic money pump draining Venezuela of what is left of its money as well as vital commodity use values. The Trump administration and Party of Order expect that as the pay in real terms of the human beings making up the Venezuelan armed forces drops toward zero, desperation will compel them to obey the orders of commander-in-chief Donald Trump and accept Guaidó as their interim president. (4)

Democratic socialists and progressives and Venezuela

Trump blames the “socialist” policies of Venezuela for the economic crisis deliberately fostered by the U.S. government! Trump’s message is clear. If you push for “socialist” policies such as Medicare for All, a $15 minimum wage, or any modification of the U.S. labor laws designed to make trade union organizing all but impossible, the result will be runaway inflation and an economic crisis like is occurring in Venezuela.

The agents of the Party of Order within the rising progressive and socialist movements who say that “we” have to do something about the “Maduro dictatorship” and his “economic mismanagement,” or who maintain an embarrassed silence, are therefore playing into the hands of the most extreme reactionaries of the GOP. Remember, according to the Republicans any reform, no matter how modest, that is in the interest of the working class or its allies is “socialism.”

In his State of Union address, Trump pointed to the crisis in Venezuela and boasted that the U.S. would never be a “socialist country.” He did not mean socialism in the Marxist sense – if he had meant that he would have said the U.S. would never be a communist country – but rather “socialism” in the sense of basic trade union rights, Medicare for All, a $15 an hour minimum wage, the end of private prisons, an end to putting undocumented immigrants including children into concentration camps, and so on.

Trump in his own way pointed to an important truth: You cannot fight for basic democratic rights, Medicare for All, and a $15 an hour minimum wage if you do not support the fight for the government and people of Venezuela against not only Trump and the GOP but also against the Democrats of the Party of Order. The Democratic Party faction of the Party of Order sometimes gives lip service to demands like Medicare for all or trade union rights but then undermine the struggle for them at every step.

The claim that the government of the United States, whether under Donald Trump or the Democratic or Republican wing of the Party of Order, is fighting for democracy in any country in the world is a lie. The people in oppressed countries that do support sanctions, such as Juan Gauidó in Venezuela and other right-wing oppositionists to the Chavistas in Venezuela, the pro-imperialist and now largely defeated rebels in Syria, the victorious rebels in Libya with their resurgent slave markets, the neo-Yeltsinite (5) “democratic” opposition to Vladimir Putin in Russia, are all revealed to be the servants of “Yankee imperialism.”

Democrats support Trump against Venezuela

The Democratic as well as Republican leaderships announced their support of Trump’s aggression. Indeed, opposition to Trump’s aggression among Democrat members of Congress has been confined to three congresspeople, one a Muslim and two Indian Americans (not Native Americans). Not a single white Democratic congressperson has actually opposed Trump’s aggression. Senator Bernie Sanders issued a mealy-mouthed statement deploring the “repression of civil society” in Venezuela. In this context, the “civil society” supposedly suppressed means the Venezuelan oligarchy that, for example, still monopolizes 80 percent of the media under the Maduro “dictatorship.”

The ANSWER Coalition (Act Now to End War and Stop Racism) has announced that it is organizing a much-needed demonstration against the U.S. aggression for March 16 in Washington, D.C. Hopefully, there will be protests – and there already have been some – in other countries whose governments have recognized Guaidó. I urge all readers of this blog to join these protests and encourage your friends and acquaintances to join them as well.

The Venezuelan crisis has divided the U.S. progressive movement. These divisions, interestingly, largely coincide with divisions within the progressive movement that have arisen over Trump’s alleged collusion with the Russian government during the last presidential election.

Many progressives see these charges as at best a diversion from the struggle against Trump’s reactionary-racist policies, while other progressives hope the “Mueller probe” will reveal evidence that Trump did indeed work with the Russian government. They hope that if the Mueller probe proves collusion, Democrats and Republicans in Congress will oust Trump, either through impeachment, using the 25th Amendment, or convincing Trump to resign. The Democratic Party faction of the Party of Order has loudly complained that Trump’s presidential campaign colluded with the government of Russia in the 2016 election while hailing the political cops of the FBI for “saving us” from the Russian puppet in the White House.

As a rule, those progressives who claim that Russia illegally intervened in “our elections” and the Mueller investigation tend to support the coup in Venezuela. Yes, it is bad that the U.S. – especially under the racist Trump – is once again intervening in Venezuela. But Maduro is a dictator and has caused a terrible economic crisis through his “mismanagement” of the Venezuelan economy. “We” – meaning the U.S. government – have to do something to restore democracy in Venezuela.

Even if we assume that Trump did violate various – not necessarily democratic – U.S. laws by collaborating with the Russian government in his 2016 presidential campaign, this would pale into insignificance compared with the collaboration that Guaidó and the right-wing opposition to the Chavistas in general have carried out with the U.S. government.

The U.S. is a far greater threat to Venezuela than the relatively weak capitalist Russia that emerged out of the counterrevolution of 1985-91 can be considered to be to the people or government of the United States. Unless Russia is willing to commit suicide by launching a nuclear war, there is little harm Moscow can do to the American people. Unlike Russia, which lost its empire as a result of the 1917 revolution more than a century ago, the U.S. controls the most powerful empire the world has ever seen.

If, all the same, Trump and his supporters should be jailed for their collaboration with the Russian government – assuming it is proven in court that they did collaborate – then why doesn’t the Venezuelan government have the right to jail Guaidó and his collaborators, the Venezuelan politicians leading the right-wing opposition to the Chavistas, not only for insurrection – the attempt to overthrow the government of his country by illegal means – but for carrying out the insurrection in collaboration with Venezuela’s most powerful enemy, the United States?

Or is there a double standard here? One for the “white” imperialist, “civilized” powers like the U.S., which cannot tolerate any intervention in their internal affairs by a foreign power when this intervention amounts to the exercise of free speech rights protected by the First Amendment of the U.S. Constitution, and another for “brown,” oppressed countries like Venezuela, which in the name of “democracy” are expected to tolerate any and all intervention in their internal affairs by the “white civilized masters.”

Over the last two years, a massive movement among young people has developed in the U.S. and throughout the world against the racist, chauvinistic policies of Donald Trump. Remember, Trump was installed as U.S. president though he lost the popular vote to the Democratic candidate Hillary Clinton – herself a died-in-the-wool imperialist. It is a mockery of formal democracy to install the candidate that finishes second in an election by a margin of almost 3 million votes.

Even worse, the defeated candidate – Trump – had appealed to racism, meaning that the votes for Clinton were disproportionately votes cast by people of color. In effect, many of these anti-racist Clinton votes, especially from the state of California, were thrown out while racist white voters in Midwestern “swing states” were given extra votes. This is the way the U.S. federal election system works, given current demographics, when it is translated into the language of the popular vote.

Trump’s election to the U.S. presidency was, therefore, a mockery of (bourgeois) democracy. This is true both in essence and in the formal sense, even if it was legal in regard to the archaic principles – which included guarantees to the Southern slave owners that their private property in kidnapped Africans would be protected. This is a part of the U.S. Constitution written in the 18th century that both Democrats and Republicans have refused to amend.

The new progressives and rising socialists are now being tested. Will they uphold democratic principles in Venezuela and unconditionally denounce the naked, undisguised U.S.-led war of aggression in both its political, economic and military (if it comes to that) aspects against Venezuela? Or will they bend to the Party of Order, which has attempted to put itself at the head of the anti-Trump movement?

The representatives of the Party of Order have been pushing to transform this movement, which began in the streets in 2016 when Trump’s “election victory” was announced, into a movement to put a Democratic representative of the Party of Order into the White House through the 2020 elections. This campaign has had some success and as a result the number and size of the demonstrations have declined. In this way, the Party of Order aims to achieve two things: (1) to largely neutralize the danger to finance capital of a new progressive and socialist movement, and (2) to exploit the youthful energy of young potential voters to get the unsuitable Trump out of the White House in favor of a “safe” Party of Order man – or woman – who they believe will serve the interests of U.S. imperialism and its world empire far better than Trump and his nationalists have been doing.

Monetary ‘normalization’

In the wake of the Depression and World War II, the Federal Reserve System began to use the manipulation of the federal funds rate as its main tool. The Venezuela crisis has unfolded against the backdrop of the Federal Reserve’s “normalization” of monetary policy, now reaching a critical point. The roots of this policy can be traced back to the Volcker shock of 1979-82. Between August 1979 and January 1980, the dollar price of gold rose from just under $300 an ounce to, briefly, $875, which meant that the amount of gold a U.S. dollar represented declined by more than half in only five months. This forced the Federal Reserve to take emergency action to save the dollar and stabilize its value.

Under normal conditions, as explained here, the Federal Reserve System and its Open Market Committee target the federal funds rate – the rate of interest at which commercial banks lend spare funds to one another overnight. When the fed funds rate – to use the slang of the money market – rises above the target set by the Open Market Committee, the Fed creates additional dollars by purchasing short-term government securities. When the fed funds rate falls below the target, the Fed destroys some currency by selling off a portion of its portfolio of short-term securities.

Manipulating the federal funds rate as the chief method of conducting monetary policy evolved out of the conditions that emerged from the Great Depression – the worst economic crisis up to the present in the history of capitalism – and World War II – the bloodiest war so far in human history – which itself grew out of the Depression.

The critical stage versus the crisis stage of the industrial cycle

The critical stage, which immediately precedes a recession, has its own characteristics. In some industrial cycles, it is barely observable as the capitalist economy transitions rapidly from boom to recession and can largely be ignored. But since the international gold-dollar exchange standard gave way in 1971 to the dollar standard proper, the importance of the critical stage of international industrial cycles has greatly increased. The most important historical example up to now occurred in 1979-80.

In the wake of the Depression and World War II, the Federal Reserve System began to use the manipulation of the federal funds rate as its main tool. As previously stated, the Open Market Committee of the Federal Reserve sets a target – it used to be secret but is now public – for this rate and creates or destroys dollars to keep the fed funds rate at or close to this target.

As the dollar price of gold soared between August 1979 and January 1980, the rate at which the dollar-denominated prices of primary commodities rose – and therefore dollar-denominated costs rose – accelerated sharply. Suddenly, businesses needed more dollars to maintain their existing level of inventories. The fed funds rate in dollar terms, like other interest rates, began to rise sharply. Under the prevailing policy, the Fed would have been forced to create ever more dollars to keep the fed funds rate within the target. This is exactly how runaway and ultimately hyper-inflation develop.

In 1979-80, it was still to be determined whether the dollar system, where the dollar is not convertible into gold at a fixed rate (for anyone, including central banks and government treasuries), could last. Global runaway inflation would have indicated the complete failure of the dollar system. In all probability, the collapse of the U.S. empire, both politically and militarily, would have followed. As Paul Volcker assumed office as the chairman of the Board of Governors of the Federal Reserve System in July 1979, the situation was not only critical in the sense of the development of the industrial cycle, it was critical in a global political sense as well.

Let’s take a look at the political situation that prevailed in those days. In Iran, the clergy was battling with the left over who would lead the revolution toppling the U.S. puppet Shah Mohammad Reza Pahlavi, Somoza was being overthrown in Nicaragua by the revolutionary democratic Sandinista movement, and the liberation war in El Salvador was growing. In the Caribbean, the Grenadian revolution led by Maurice Bishop was inspiring the descendants of Africans slaves throughout the Caribbean and finding echoes in African-American communities within the U.S. And last but far from least, the socialist camp headed by the Soviet Union still existed.

In 1979, Leonid Brezhnev was still alive – he would live until November 1982. Brezhnev and the men around him – they were, unfortunately, all men – were the final representatives of a fast-fading political generation that had come of age under J.V. Stalin. They had been shaped by struggles for a planned economy and industrialization, as well as collectivization of agriculture, all reflected in the internal party struggles that led to the purges. They had been steeled in the fire of the “Great Patriotic War” that finally destroyed Nazi Germany. But where would the Soviet Union and the Eastern European countries go when the generation that Brezhnev represented finally left the scene?

That was still very much an open question in 1979. Would the USSR and Eastern Europe remain on the course of socialist construction, or would the tendencies toward the restoration of capitalism already making deep inroads – most obviously in Eastern Europe but in the Soviet Union as well – prevail.

We now know that the pro-capitalist forces were victorious. But would these forces have come out on top if the capitalist world was collapsing into hyper-inflationary chaos? We, of course, do not know the answer to that question. But what we do know is that 1979-80 was a critical period not only in the history of the capitalist industrial cycle but in world history as a whole.

Realizing the stakes involved for the entire capitalist system, the newly appointed Federal Reserve Board of Governors chairperson who had been nominated by the Democratic President Jimmy Carter, Paul Volcker, was determined to end inflation the only way it could be ended – by declining to create the ever-greater quantity of dollars that would have been necessary to keep it going. It was announced that the Federal Reserve was abandoning its policy of targeting the federal funds rate. Instead, it adopted Milton Friedman’s suggestion that the Federal Reserve target the money supply while allowing interest rates to go where the market would take them. This represented the high point of Milton Friedman’s influence.

However, the Fed did not target the rate of growth of the monetary base, the high-powered money supply in dollar terms – the variable the Fed actually does control. Instead, the Fed targeted the high-powered money supply plus checkable deposits, which it does not control. The problem was that Friedman, who assumed that capitalism was extremely stable, believed that the ratio of the quantity of dollar-denominated high-powered money to the quantity of bank money – checkbook money created through bank loans by the commercial banking system – was stable if the Fed kept the rate of growth of high-powered money stable. In reality, this ratio is extremely unstable.

The pragmatic Volcker was no admirer of Milton Friedman and seems to have held him in contempt. But it was simply impossible politically for the Fed to announce that it was deliberately raising the rate of interest to the level that was actually necessary under the then-existing conditions to stabilize the dollar. However, taking advantage of the fact that few people understand how central and commercial banking actually work, and announcing that the Fed was changing its target from the federal funds rate to the “quantity of money,” appeared as simply a technical matter to the lay public.

However, as soon as interest rates did explode upward, as he knew they would, Volcker became one of the most hated men in the United States. Farmers and building contractors staged demonstrations against him in front of the Federal Reserve headquarters in Washington, D.C. But at the price of the highest unemployment since the Great Depression, the international dollar standard and with it the U.S. dollar system was saved and with it the U.S. world empire.

How Volcker saved the U.S. dollar and the Empire

Volcker saved the U.S. world empire by keeping the growth of the monetary base at around 6 percent. He refused to meet the increased demand for dollar-denominated loan money being generated by the accelerating dollar price inflation. As interest rates soared, merchant capitalists were forced to liquidate inventories – recession – and a general scramble for dollars, which had retained their role as the chief means of payment, began.

The dollar would have lost this role if inflation had been allowed to develop further, but Volcker’s policy prevented that. This was his great success. As a result, the rise in the dollar price of gold was broken, the threat of global runaway inflation ended, and the dollar system was consolidated. The critical phase of the industrial cycle gave way to the recession stage and, after 1982, the recovery phase.

On the political side, the critical phase in world politics began to be resolved in favor of the forces of reaction. In Iran, the clergy came out on top against the workers’ movement and the left. Ronald Reagan was elected president of the United States, and Thatcher became British prime minister. Then, impressed by the renewed “stability” of the capitalist system, Mikhail Gorbachev as representative of the pro-capitalist forces within the Soviet Union came to power in March 1985.

Today, as the worldwide industrial cycle is in – or near – its critical stage, we again face a critical stage in world politics. If Chavista Venezuela emerges victorious once again as it did in 2002, the current reactionary political cycle in Latin America, still in its early stage, may yet be broken before it goes further. But if the Chavistas, after more than two decades of struggle, are finally overcome, the reactionary cycle in Latin America will deepen and may last for decades. Either way, the outcome will have implications far beyond Latin America.

Further observations

Unlike the crisis of 2008, during the critical phase but not the crisis phase (August 1979 – January 1980) – there was monstrous demand not for dollars as a means of payment but for gold bullion as a means of hoarding. Volcker’s supreme task was to divert the demand for gold bullion as a means of hoarding into a demand for dollars as a means of payment.

During the critical phase of the industrial cycle that preceded the crash of 2008, the dollar price of gold also rose sharply but not to the extent it did in 1979-80. The Fed had learned its lesson. The Bernanke Fed resisted the temptation to gun up the monetary base until the crisis proper arrived. Only at that point, when a huge liquidation of inventories by the world’s merchant capitalists swept the globe leading to a historic rise in the demand for dollars as means of payment, did the Fed finally begin to flood the banking system with newly created U.S. dollars in order to “save what could be saved.”

Every critical phase of the economic cycle, including the one we are going through now (2019), has the theoretical potential of turning into a 1979-80 type crisis if the Fed – or whatever central bank plays the dominant role – in a bid to stave off the inevitable cyclical recession creates “too much” central bank money and sets off a massive devaluation-driven inflation. However, once the recession proper arrives, the danger of devaluation-driven inflation largely disappears until the next critical point arrives at the end of the next industrial cycle.

Federal Reserve monetary policy from the Volcker shock to the ‘Panic of 08’

In 1987, the Fed dropped its the targeting of the “money supply” and returned to targeting the federal funds rate. It maintained this policy until the next major crisis arrived in the fall of 2008. It is now attempting to return to its policy of targeting the fed funds rate, its preferred policy under “normal circumstances.”

Let’s look at the Fed policy as it has evolved from the end of the Volcker shock until today. Between 1984 at the end of the Volcker shock and now – February 2019 – the Federal Reserve System’s monetary policy can be divided into four periods of different lengths. These periods are defined by the annual rates of growth of the U.S. dollar monetary base. The first – and by far the longest – lasted from the end of the Volcker shock to 2004. During this period, the U.S. economy experienced two “ordinary” recessions – described as “mild” by the economists – and only a gradual rise in dollar prices.

The first of these two recessions came in 1990-91 during the George H.W. Bush administration, which helped ensure that the elder Bush was only a one-term president. The second was associated with the dot-com crash and with the Asian crisis of 1997. In the imperialist countries, recession-stagnation conditions began in 2000 and lasted into mid-2003. The events of 9/11 and the mild character of this cycle make its exact dating somewhat ill-defined.

There were two minor recessions in the U.S. economy that are not counted as “official contractions.” One came in 1984-85, which hit Silicon Valley hard, and another occurred around 1994. The 1984-85 recession was actually quite severe in Silicon Valley partly because it coincided with the transition from the 286 to the 386 Intel computer chips. The 386 was the first Intel CPU that could run modern operating systems. Today, the smartphone industry is facing a similar transition from the G4 to the much faster G5 network. Today’s smartphones cannot take advantage of the much faster G5 networks, but ones that can will soon be on the market. Who wants to buy a smartphone that will soon be obsolete?

Overall economic growth was subdued in the U.S. and de-industrialization progressed, but there were no extreme crises on the scale of the 1970s or 2008-09. This helped give the period a superficially prosperous veneer even while the U.S. – and economies of other imperialist powers – decayed as industrial production shifted to China and the countries of the “global south.”

Indeed, if you were an owner of stocks, you benefited from the sharp rise in the rate of surplus value that the shift of industrial production to the global south implied in the form of rising stocks. Opponents of capitalism call this period the “neo-liberal” period, but Ben Bernanke named it the “Great Moderation,” claiming that the central bankers had finally figured out how to tame the “business cycle.”

During the Great Moderation, the Federal Reserve Board kept the annual growth of the U.S. monetary base pretty steady at around 6.35 percent, which was roughly the rate of growth during the 1970s. This rate of growth was clearly much too high to prevent the rise in the dollar price of gold in the long run, because the annual average rise in the global quantity of gold is generally estimated as between 1.5 and 2 percent.

Over the very long run, measured in decades, assuming a 2 percent rate of growth of gold bullion in the world, this would imply an average rise in the dollar price of gold of around 4 to 5 percent subtracting the rise in the quantity of gold bullion of 1.5 or 2 percent from an increase in the dollar monetary base of around 6 or 6.5 percent at the high end. This supports a gradual rise in the cost of living (but not runaway inflation), which the Fed thinks is most consistent with capitalist prosperity.

Holding down the rise in the dollar price of gold during the Great Moderation were record levels of production of gold bullion that began in the early 1980s and lasted until 2000. This indicated that the golden prices of commodities were either below or near the global prices of production, in contrast with the late 1960s and even more with 1920s when golden market prices were well above the golden prices of production.

The dollar price of gold, though fluctuating considerably, remained within a trading range well below the $875 briefly hit in January 1980 and a low of $250 but generally pretty close to $350 per ounce. This meant that the Fed could get away with a 6.35 percent rate of increase in the dollar-denominated monetary base without triggering a new 1970s-type U.S. dollar currency-driven inflation. The golden prices of most commodities were rising but remained below the levels of the late 1960s that halted the rise in gold production at that time.

It seemed that the Great Moderation might last for another decade or so before the gradual rise in golden market prices would create the conditions for a new sharper crisis – that is, unless something outside the internal mechanism of the industrial cycle intervened. As it turned out, something did intervene. But the “something” was not a war like World War I or the Vietnam War but rather an event outside the sphere of politics entirely. This time the event occurred in the sphere of geology.

Geology intervenes

The second period of the Federal Reserve’s monetary policy stretches from around 2004 until September 2008. This was another critical phase in the industrial cycle but with two extra ingredients. One was the abnormal expansion of the credit system due to the record rates of interest that had prevailed early in the Great Moderation. This dangerous credit inflation – also called financialization was rooted in the previous crisis. Things were then brought to a head by a drop in world gold production that occurred between 2001 and 2008.

Recessions in world gold production are typically associated with either very strong economic booms or big wars that finally drive the golden prices of commodities well above the golden prices of production. There were no lack of wars – these were the years of George W. Bush – but none of these wars was big enough to cause a significant “golden inflation” of prices.

The South Africans goldfields, which had been the chief source of new money material from the 1880s – except briefly during the 1890s gold rush in Alaska and Canada – until the turn of the 21st century, finally began to give out. It was simply impossible, given the existing technology, for the gold capitalists to dig any deeper into the earth in search of new gold. Workers in the South African gold mines are forced to work under barely tolerable conditions of heat that exist deep within the Earth.

The result was a rise in the relative value (to that of non-monetary commodities) of gold bullion. As the output of the South African gold mines dried up, an ounce of gold bullion represented more human labor than before. This meant that the values (or prices of production of commodities, which are merely transformed values) of commodities were now expressed in golden prices that were lower. The golden market prices of commodities that were more or less in line with the golden prices of production during most of the Great Moderation were now above the now lower golden prices of production. This is a classic illustration of the law of labor value in operation. But the lowering of golden market prices to the new lower values – or production prices – of commodities is not an automatic process. It could only be achieved through a sharp crisis. And that is exactly what happened.

As the decline in gold production became increasingly obvious, gold became increasingly scarce. For years, gold bulls – called gold bugs – had speculated on higher dollar gold prices and been frustrated as every spike in dollar gold prices was followed by new declines. But now their luck changed. The dollar price of gold finally broke out to the upside from the range it had fluctuated within during the post-Volcker shock era. This upward break out announced that the Great Moderation was not long for this world.

The now much weaker dollar against gold began to raise the prices of primary commodities in “the pits” (to use the market slang). As this happened, the cost price of commodities expressed in the once again devalued U.S. dollar began to push up dollar prices at the wholesale level. If this continued, it would be only a matter of time before these higher dollar prices spread to the retail level. While it is unlikely Bernanke or his fellow members of the Open Market Committee had any real theoretical understanding of what was going on, they could not ignore what was happening in the marketplace. They had, after all, lived through the 1970s.

But there was one difference with the 1970s. Thanks to the Great Moderation itself, the level of debt was relatively – not simply in dollar terms but in terms of dollar-denominated incomes – much higher than it had been during the Volcker shock. If a new 1970s-style devaluation-driven inflation were to occur again, not only would the U.S. dollar-based international monetary system be threatened by collapse but the new “Volcker shock” that would be necessary to rescue the dollar would imply a much sharper crisis than the Volcker shock recession of 1979-82.

By 2004, the Fed  officials may have continued to prattle in public about the wonders of the Great Moderation, but they were becoming aware of the looming danger to capitalist economic and political stability coming in the form of the rising dollar prices of primary commodities. The second period of the Fed post-Volcker shock period had arrived.

Between September 2004 and September 2008, the rate of growth of the U.S. dollar-denominated monetary base was only 2.67 percent a year, a sharp slowdown from the 6.35 percent that had prevailed during the post-Volcker shock period up to that time. The abandonment of the gold standard was and is justified by the fact that under the gold standard the central bank’s monetary policy is constrained by the growth of the quantity of gold that is necessary to redeem its banknotes at a legally defined rate.

Without a gold standard, the central bank – in this case the Federal Reserve System – is free, the argument goes, to expand the monetary base according to the needs of the real economy and not the need to redeem its notes in gold bullion or coin at some fixed legal rate. The rate of “real” economic growth was extremely modest during the George W. Bush years, so no slowdown in the rate of growth of the U.S. monetary base was justified by any need to restrain surging real rates of economic growth. However, surging dollar raw material prices showed that the U.S. dollar-dominated international monetary system was facing an incipient devaluation-driven inflation. The only way to stop it was to deny it the dollars the inflation would need to really get going.

Despite the sharp slowdown in the rate at which the Federal Reserve System was creating new dollars, the dollar price of gold bullion rose from around $420 an ounce in September 2004 – still within the limits that had prevailed during the post-Volcker shock era and well below the Volcker shock peak of $875 – to $800 at the beginning of 2008, even briefly hitting $1,000 for the first time in March 2008 during the near collapse of the giant Bear-Stearns investment bank.

Bears-Stearns was forcibly merged into gigantic universal bank J.P.Morgan-Chase. To make matters worse, despite the modest quantity of new dollars created by the Fed, the cancer of inflation was spreading from the sphere of primary commodities to the wholesale level. The “market” was clearly saying to the Fed that it believed the Fed would “call uncle” and flood the banking system with new dollar reserves before severe recession conditions arrived, all the more so because 2008 was an election year. But much to the surprise of the markets, the Bernanke Fed stood firm.

The third phase – quantitative easing

The third phase of Fed monetary policy began in September 2008 with the collapse of the gigantic Lehman Brothers bank – no bank could be found willing to buy it. In a sense, Lehman Brothers was not only too big to fail, but it was also too big to rescue. At that point, quantitative easing was launched.

As always happens during recessions to some extent – but to a much greater extent than in a “normal” recession – the role of money as a means of payment came to the fore. Despite triple-digit annualized rates of growth of the monetary base during the weeks that followed the Lehman collapse, the dollar price of gold fell to around $730 as gold speculators who had been betting on still higher dollar gold prices were forced to dump gold on the market to raise dollars for debts coming due. Once again “cash was king,” and cash in this case was still the U.S. dollar. As the crisis subsided, the U.S. dollar gold price began to rise once again approaching but not quite reaching $2,000 in 2011.

The Fed was now obliged to slow down and for awhile halt the growth of the dollar monetary base. But as the dollar gold price fell back and the economy failed to boom and at times even looked as if it might stall, the Fed moved to launch new rounds of quantitative easing. Quantitative easing came in waves, but it definitely halted in October 2015 and brought to an end the third phase of the Fed’s post-Volcker shock monetary policy.

During the era of quantitative easing, from September 2008 to October 2015, the U.S. dollar monetary base grew at an annualized rate of around 20 percent. This dwarfs the growth rates of the inflation-ridden 1970s. In the long run, however, this rate of growth of the dollar-denominated monetary base cannot be sustained if the dollar system – and the U.S. empire – is to continue. The fact, however, that golden market prices fell once again to and probably below the now lower golden market prices of production gave the Fed room to maneuver. This was achieved through a rise in the dollar price of gold with market prices of commodities in dollar terms remaining more or less unchanged.

The fall in the golden prices of commodities has not been enough to revive South African gold production. But the exploitation of gold deposits in many countries that were not profitable at the old values are now profitable at the new values. New gold mines have been opened and existing ones expanded in China, Russia, the United States, Canada and other countries. No country now dominates gold production like South Africa once did.

However, the rate of growth in world gold production is nowhere near high enough to lead to a 20 percent a year increase in the quantity of gold bullion. If it was, this would imply a huge devaluation of gold, which would lead to its demonetization, much like silver became demonetized in the late 19th century.

Therefore, the Fed has been forced to begin the fourth period of its post-Volcker shock policy marked by a contraction of the U.S. dollar-denominated monetary base. Between October 2015 and October 2018, the monetary base declined at an annualized rate of 4.70 percent, and this rate of decline has since accelerated.

This process can only end in a major new recession, though its severity is yet to be determined. What the Fed hopes to do is to get through the next recession without a return to quantitative easing. If they can’t, the dollar system will be undermined. The current record levels of gold production are working in the Fed’s favor, but it remains to be seen whether they can pull this off and for how long.

The Fed did manage to avoid a return to quantitative easing during the global mini-recession of 2015-16, which was at least partly the result of the Fed transitioning from expanding to contracting the monetary base. But will the Fed be able to do this with a full-scale recession whose immediate cause will be the three-year-long negative rate of growth of the U.S. dollar-denominated monetary base? When the recession arrives, the Federal Reserve System will almost certainly move to push the rate of growth of the monetary base back up into positive territory. Fed policymakers will hope to do this by simply lowering their target for the fed funds rate, now still at an historically low 2.5 percent.

Concern has been expressed in the financial press that a fed funds rate of 2.5 percent doesn’t give the Fed a lot of room to lower the rate since the rate is pretty much bound at 0 percent. This may force the Fed to return to a policy of quantitative easing even if the next recession is an ordinary one and not a “Great Recession.”

Fourth phase starting?

There are signs we are about to enter, or perhaps have already entered, a fourth period of the Fed’s monetary policy, where the Fed will once again allow a renewed expansion of the dollar-denominated monetary base. Writing for Reuters – undated but around January 9 (2019), Ann Saphir reports that “Federal Reserve policymakers have indicated they may be open to tweaking a longstanding plan to shrink the central bank’s balance sheet, including by shedding housing-backed bonds earlier than anticipated or keeping a bigger-than-expected portfolio of assets.”

Translated from central bank talk, the Fed is considering breaking the implicit promise it made to “the market” that it would destroy a considerable quantity of the dollars it created during its quantitative-easing period. The risk of breaking this promise is that the Fed could fatally undermine its credibility triggering a new wave of dollar-devaluation inflation that would undermine, potentially fatally, the dollar system.

If this happens, among other things we would see a new rise in oil prices, which would strengthen the hands of Chavista Venezuela – if it can hold out – Iran, Russia, and other major oil producers. Experience indicates that the U.S. world empire is always overall weaker during “weak” U.S. dollar cycles as opposed to “strong” U.S. dollar cycles.

Could this be a factor in Trump’s decision – or those around him – to declare war on Chavista Venezuela at this particular time? They may be thinking, let’s finish with the Chavistas now before a possible new dollar crisis.

To be continued.


1 Does this mean the policies of Maduro’s government have been perfect? Since perfection is unknown in human institutions whether trade unions, political parties, or governments, and since “perfect” persons and leaders who never make mistakes are unknown, it would be astonishing if Maduro and his government are the sole exception in all of human history.

However, as a cause of the current economic crisis, any mistakes made by Maduro or other Chavistas, or even corruption within the Venezuelan government, pale into insignificance. In reality, those who claim that the mistakes of Maduro and the Chavistas or corruption among the Chavistas are the cause of the Venezuelan economic crisis are, whether they know it or not, echoing the Empire’s propaganda. (back)

2 Aren’t the Chavistas – under both President Chavez and President Maduro – subject to the criticism that they have failed to end Venezuela’s monoculture oil economy? Not at all, because the very name Bolivian Revolution points to the road out of the trap of a monoculture economy. The Bolivarians, as the Chavistas prefer to call themselves, are named after Simon Bolivar, who in the 19th century attempted unsuccessfully to unite Latin America into a single nation-state. This points to the road out of the trap of an oil economy Venezuela finds itself in. (back)

3 The 2015-16 downturn and not Russian intervention in “our election” was likely one of the factors in the surprise Electoral College victory of Donald Trump. (back)

4 We all hope the Venezuelan people choose to resist. But we can’t expect them to resist as the remaining money and commodity use values are pumped out of Venezuela without major actions of solidarity in the streets in the U.S. and around the world. Trump and Pence are for other reasons already despised by the majority of the people in the U.S. and around the world. Therefore, we must immediately demand the resumption of normal diplomatic relations by the governments of “our” own countries with the real government of Venezuela, the one headed by President Nicolas Maduro. Resume normal diplomatic relations with the Venezuelan government! End the economic war – the so-called sanctions now! End the threats of military action.

If this is done, there is a chance that Venezuela will find a way to sell its oil to other countries while the leaders of the European governments who pretend to oppose Trump but have gone along with him in his war against Venezuela find themselves spiraling into disgrace! The fact that Trump is so hated as an obvious racist with his “build the wall” slogan, and has no claim to be a “democratically elected” president since he received neither the majority nor the plurality of the popular vote is a great advantage we have in this struggle. Whatever the difficulties of the struggle, it would be a far harder struggle if somebody like Obama was president. This is one of the reasons why the Party of Order wants to get rid of Trump. As always, it is the struggle of living forces that will determine the outcome. (back)

5 Just as is the case with opposition to Trump in the U.S., opposition to Putin in Russia is varied, ranging from the extreme right to extreme left. But when the U.S. media champions the opposition to Putin that backs the sanctions against Russia in order to support the struggle for “democracy” against the Putin “dictatorship,” they mean the opposition forces that pine for the days of Boris Yeltsin. In those days, everything that existed in Russia was for sale to the highest bidder. (back)